Qualified dividends: A good way to mitigate that tax bill

Published: April 13, 2019Updated: May 17, 2019

By: Stash Graham

For an investor, who is approaching, or is in retirement, maximizing asset growth is not a typical goal, but maximizing income generation is. Thus, Instead of trying to reach for high yield in a weaker company, take a look at better capitalized companies whose dividends are considered “Qualified” (as known as ‘QDI’ or Qualified Dividend Income).

This type of dividend is federally taxed at the long-term capital gains rate instead of ordinary income. For example, in tax year 2017, investors in the 35% (or below) tax bracket, the long-term capital gains tax is 15%. An investor at the highest tax bracket (at 39.6%) would pay 20%. Qualified dividends can provide a materially higher after-tax equivalent yield for income focused investors without the exposure to poorly capitalized companies. This particular strategy benefits the higher tax bracket investor looking for supplemental income. President Trump’s tax reform bill did not change this tax benefit.

For illustration, a “qualified dividend” paying investment yielding 5.8% (like one of our investments last year in investment grade-rated and systemically important bank, Wells Fargo) would produce an after-tax equivalent yield of 6.8% to our highest tax bracket investor.